Investment & Financial Articles
Title: SWOT Analysis
Author: Chris Mallon
Article:
If you've ever listened to Warren Buffett talk about investing,
you've heard him mention the idea of a company's moat. The moat
is a simple way of describing a company's competitive advantage.
A strong competitive advantage, or a wide moat, gives a company
sustainability, which, as investors, we're highly interested in.
In this article, we review a popular tool for evaluating
competitive advantage, called SWOT analysis. SWOT analysis
should be done on every company we're thinking of making an
investment in.
SWOT stands for:
Strengths Weaknesses Opportunities Threats
Analyzing these four factors will help you make better
investment decisions. It's a brainstorming exercise, so take
your time. A good SWOT analysis takes effort, but the more you
put into SWOT analysis the better you will understand the
company. Let's look at each factor in turn.
Strengths
First, we look at the company's strengths. What does the company
do well? What makes it better than others? What does the company
have, or do, that sets it apart from its competition?
These are important questions, and should include aspects of the
company that made you consider it for investment in the first
place. Look at branding, image, pricing power, size, market
share, financial position (balance sheet strength), etc.
Here are some strengths to look for: .The size of the company
relative to others in the industry .Balance Sheet strength .Cash
flows .Perception of the company's products .Perception of the
company's brand(s) .What advantages the company has over its
competitors .In general, what does the company do well?
Weaknesses
Now that you've determined how wonderful the company is, it's
time to look for the weaknesses. The same questions should be
asked when looking for weaknesses. What does the company do
poorly, or not so well? What are other companies doing better?
What is keeping the company from greater success.
It's important that you don't gloss over this section. SWOT
analysis is a brainstorming effort, so don't discount anything
that comes to mind. If you perceive a weakness, list it. The
weakness you fail to list today could be why your investment
turns out poorly next year.
Some weaknesses to look for: .Deteriorating balance sheet .Poor
perception of company's brand(s) and/or products .Advantages
other company's have? .Lack of management or other employee
talent .In general, what does the company do poorly?
Opportunities
We shift our focus to external factors when we look at
opportunities. Here we try to identify areas of business we
think the company is looking to enter, or should be looking to
enter. We also look for opportunities to gain market share from
competitors, or grow the company's market to new customers.
But there are more than just external opportunities. There are
opportunities within a company that should be considered. Can
the company combine product lines to increase sales? Maybe the
company has duplicate costs that can be streamlined. Companies
can always find ways to do things better.
Some opportunities to look for: .New markets for products
.Financial or legal trouble for competitors .New technologies
the company could adopt .Changes in regulatory / tax burdens
.Strategic investments .Internal efficiencies
Threats
Finally, we need to consider threats to the company. Again,
threats can be internal as well as external. In fact, I've found
that internal threats usually come first, which opens the door
to external threats. Therefore, it's important to do a good
threat analysis.
Internal threats aren't usually classified as such, which I
think is a mistake. Any internal problem is a threat to the
company's well-being and should be evaluated alongside the
external threats. For example, a company that relies on
developing innovative products, such as Microsoft or Intel,
faces the threat of losing engineering talent every day. This is
an internal threat that could easily pave the way for external
threats.
Some possible threats are: .Internal obstacles the company is
facing. .Financial constraints on the company. .Cash flow
problems. .The relative position of the company's largest
competitors. .Technological advances in the industry (if the
company isn't keeping pace). .New technologies that threaten to
displace the company's products. SWOT analysis is a
brainstorming activity, and you should learn from it. Focus on
the weaknesses and the threats when doing SWOT, because that's
what will turn around and bite you after you make your
investment. I'm not saying you should look only for the
negatives, and ignore the company's potential. But you should
analyze the risks with as much, or more, scrutiny then the
opportunities. Opportunities don't always show up, but somehow
risks always do.
About the author:
Chris Mallon is the editor and publisher of the Undervalued
Weekly, a financial analysis newsletter. Chris holds a Master of
Science in Finance and is the leading analyst for the Dynamic
Investors partnership. He is available at
chrismallon@dynamicinvestors.net or the through the website at
www.dynamicinvestors.net/index8.html
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